How Relationships Drive ROI in the Tax Credit Marketplace

Adam Shor: Along the way, I tried to pick up on where folks were having the biggest issues and what were the biggest logjams for future deployment of solar, both from a commercial standpoint, a utility-scale, behind-the-meter, everything. And one of the biggest problems that folks focus with, or their biggest challenge is, is tax equity on the project financing front. But in order to be able to speak articulately about that, I had to be able to understand the underlying aspects of solar, and so that’s how I’ve gotten to where I am today.

Narrator: Welcome to the Future of Commercial Real Estate, where innovation meets the built environment. Join us as we explore stories from pioneering professionals in the CRE industry, uncovering the strategies, best practices, and lessons learned that are shaping the future of sustainable commercial real estate. Your host throughout this journey is Sean Swentek, VP of Marketing at Omnidian. Now let’s dive right into today’s episode.

Sean Swentek: Welcome, everyone. Thank you for tuning in to another episode of the Future of Commercial Real Estate. I’m here today with Adam Shor of Shor Power. Welcome, Adam.

Adam Shor: Thanks for having me. I’m happy to be here.

Sean Swentek: We’re excited to have you on the show. Can you tell me a little bit about your history in solar?

Adam Shor: I’ve been in solar in some form or fashion for about 16 years. I work with commercial solar developers and tax equity investors all across the country, and everybody can do what I do. I am just a time arbitrage. I can just help you do it faster and get connected to the folks that you want to know sooner so that you can get your project done.

Sean Swentek: Something tells me not everyone could do what you do! What was the inflection point for you in the solar industry that caused you to go down the path you’re on today?

Adam Shor: First off, it’s been wildly interesting. I give full credit to my middle brother, who a long time ago, when I was doing the backpacking trip post-college, we were standing on a rooftop in Greece, and he asked me, “What are those things?” And I said, “I thought they were solar panels.” They were actually solar hot water heaters. And he asked me this fateful question. He says, “Why don’t we have these in Texas?” (We’re both from Dallas.) And I said, “I don’t know. That’s a great question.” And this is February of 2007, and that was right when Germany had brought in the feed-in tariff. And so you had farmers literally putting solar panels on their barns to make money from going solar. And ever since, it’s just been a continual run.

Sean Swentek: And how has your focus changed over the years? I know now you’ve got a huge focus on tax equity and tax credit.

Adam Shor: I think for the first about half of my career in solar, I had to really just learn how everything worked. I did a master’s degree in photovoltaics and solar energy from the University of New South Wales in Sydney, Australia. I feel very lucky and fortunate to have been able to do that. And then I came back to the States and spent the next several years building up my network. And I would say this to anybody getting into solar or that’s been in solar for a long time, relationships are both invaluable and indispensable, okay? The folks that you get along with and can demonstrate you can work with are like… hold on to them.

But I spent the next several years kind of learning the different disciplines of development technology, going through the bankability curve, project financing, EPC, and then structured finance. And along the way, I tried to pick up on where folks were having the biggest issues and what were the biggest log jams for future deployment of solar, both from a commercial standpoint, utility-scale, behind-the-meter, everything. And one of the biggest problems that folks focus with, or their biggest challenge is, is tax equity on the project financing front. But in order to be able to speak articulately about that, I had to be able to understand the underlying aspects of solar, and so that’s how I’ve gotten to where I am today.

Sean Swentek: What are the primary financing options for a solar developer in today’s market?

Adam Shor: So I would reframe that question slightly, and I would just say that for anybody that wants to potentially own solar, whether that be a property owner or a developer, and the first and easiest way is just use your own money and get a loan to combine with that. And Congress has created these tax incentives where whoever’s the owner of the project gets to benefit from both depreciation and tax credits. However, there are a lot of structures that have been created if you’re not in a position to be able to monetize those tax benefits. And in many instances, solar developers are not in that position. In some instances, property owners are not in a position to monetize those things. That’s created third-party structures. And then most recently, courtesy of the Inflation Reduction Act, now we have the ability to do transfer credits.

It’s kind of like Baskin Robbins: you can walk in and there’s 31 different flavors of solar finance. It just depends on what is most appealing to you. Different structures often optimize for different things. If you’re focused on the highest return, that’s one approach. If you’re focused on the most efficient use of your capital or the least amount of deploying your capital, that’s another thing. If you’re focused on the most deployment of your capital, if you’re focused on trying to build and own a portfolio of projects… I think the underlying strategy of what your business is going to color the appropriate financing approach more so than just optimizing for the highest IRR.

Sean Swentek: Historically, have you seen that developers have a bigger appetite for one type of financing, and are you seeing a shift in that?

Adam Shor: Yes and yes. Historically, developers tend to want traditional tax equity, so that’s a partnership flip or an inverted lease, occasionally a sale leaseback. And the reason for that is they can optimize the financing to bring in the most amount of outside capital that they possibly can. With transferability, you have to be cautious about the step-up. Now, there are some preferred equity approaches where you sell a minority interest in the asset at a true third-party sale that facilitates an FMV step-up. FMV, for those of you not familiar with that, is fair market value. And in so doing, it allows you to unlock the full step-up and then transfer the credits at that value. But I think most developers want the tax equity first if they can get it, and if they can get it, then they’ll go that route. If they can’t get it, they’ll look for transferability.

I will also say that some developers are using traditional tax equity for their larger projects and then transferability for the smaller projects, because a tax equity deal is complicated. The lawyers love to get involved because the lawyers always make money regardless of the situation. And transferability unlocks some things as it relates to just an ease of a transaction for smaller deals that may not be able to amortize the expense of a tax equity transaction, given the scale of the dollars involved.

Sean Swentek: For real estate investors and owner/operators specifically, what are the benefits and drawbacks of the different types of financing?

Adam Shor: The first and foremost thing that a real estate solar owner needs to consider is whether or not they want to be the owner of the asset or if they want to have the flexibility to sell the underlying property whenever they want to. The thing to consider and the thing to recognize that you don’t have to deal with on the real estate side is solar has a five-year recapture period associated with the tax credits, okay? Whether that be transferability or on the tax equity side, if you transfer the majority interest of the solar project to a different beneficial owner, then that can trigger a pro rata recapture of those tax credits. And that’s a, it’s a materially bad thing from an economic standpoint.

Most real estate owners want the flexibility to sell a building whenever they deem it appropriate. And so if they want to maintain that, then they have to essentially structure the solar asset in a way that they can sell the underlying property, but not necessarily trigger any sort of recapture associated with the solar project. Once you take those things into consideration, then it does still come back to whether or not the real estate owner wants to be the owner of the solar, or wants to just be the offtaker of the solar.

And there’s also a third option that’s coming about in certain markets that have community solar, and that’s the real estate property owner can literally just be essentially another landlord. They can just lease the roof space to a solar developer who wants to use that to build a community solar project. And that developer will pay the landlord rent — another stream of rent. I mean, look at that. Now you can rent your roof. It doesn’t work everywhere, but it does work some places. And where it does, it can be accretive.

Sean Swentek: If you’re a real estate investor and you have a large fund that you’re trying to deploy across your properties, where do you even start when it comes to all these decisions that have to be made about how to structure finance for renewable projects that you might want to execute on your properties?

Adam Shor: That’s a good question. First and foremost, there are lots of resources in solar, and I would recommend trying to educate yourself first before diving headlong into this stuff. It used to be that it was hard to make money in solar, and I don’t want to say it’s easy now, but there are lots of options now. There’s never been more opportunity. I think that as a property owner, you want to evaluate which of your sites is most accretive, and there are developers that can help you with that. They can do that on a consulting basis, or you can bring them in-house, or you can build that skillset yourself. But you want to figure out where to build first.

And then also you want to understand the nuances of the fund that you have available to deploy and whether you have LP’s and if it is a tax-advantaged fund structure, or if it’s just traditional equity. I mean, there’s lots of nuances in terms of what to consider first, okay? I’m happy to speak with them about this, but at the same time, there are many other people that can do this, too.

Once you figure out how to structure it, then you’ve got to find the right partners. Traditional debt is more ubiquitous. Construction financing is a little bit harder to sort out relative to permanent debt. There are lots of government programs that are also incentivized to lend to solar: the USDA program for rural projects and so forth. Solar for all is coming down the pike here soon.

And then the trickier part is on the tax side and the tax equity and finding the right tax equity partner to either literally partner with you on the project and/or potentially be the owner and sell you the power. But I would say before you go down the path of trying to optimize your financing, you need to figure out what is the best ownership structure and or potential offtaker scenario for you and your business. Does your business have the ability to get the debt financing for the project? How old is the property? How old is the roof and so forth? Or is it potentially more accretive to you as a business owner and a property owner to just get lower electricity bills? And that can be wildly accretive, too.

Sean Swentek: If I’m a REIT and I’ve decided to embrace the tax credit marketplace and transferability, and I’ve got some projects in mind, where do I even start to sell those tax credits?

Adam Shor: The short answer is it depends. The longer answer is it depends on how many credits you have and where they’re located. And solar tax credits are very calendar year specific, okay? So oftentimes it’s kind of like vintages. Are these credits 2024? Are these credits 2025? And so forth. And there are different pools of buyers for the different types of credits. You also need to understand that if you have a million dollars’ worth of tax credits that you are trying to transfer to somebody, you can’t really, in all practicality, go to Wells Fargo or Bank of America and say, “Hey, I’ve got a million dollars’ worth of tax credits to potentially sell you.” Their tax liabilities are in the billions of dollars. It is not time efficient for them to try and transact at the scale that you are looking at.

You need to find a buyer that a million dollars of tax credits is meaningful to, and that typically represents a regional bank and/or just a corporation. And a lot of these places that are in the market for these transferable tax credits may not know that you have these available. And that’s why we now have the various platforms that have come about: Crux, Atheva, Reunion, and so forth. And there are others. And so it very much goes back to the relationship component. But thinking about it from the investor’s perspective or the buyer of the transfer credit perspective, each project is unique, and each project comes with its different risk profile. And so a transfer credit may have the same economic effect of another transfer credit, but the underlying risk profile of one is different from another. And so they’re not a commodity. I just want to make that clear.

Sean Swentek: As a real estate investor, if I decide to engage with you to help me in the process of utilizing the tax credit marketplace, what does the actual process look like?

Adam Shor: To begin with, it is several conversations. It’s just to understand what is it that you think you’re trying to do and what is it that you want to achieve? What’s the ultimate goal, and what is the scale of resource that you can bring to bear for this goal? Is it dollars? Is it property? Is it something else entirely? And then once we define what we’re trying to achieve, then we go about working to make that happen.

I know that sounds a little bit general, but there are developers of projects all over the country. And the programs within which they’re developing vary from state to state. And depending upon your offtaker type, depending upon your credit profile, both on the project side, the offtaker side, and also the sponsor side, financing can be easier or can be really hard, and then also the size and the scale that we’re talking about. And so the biggest thing is understanding what is the goal and what sort of ecosystem within the financing world do we need to go and speak with? Because if the project is a 1 MW project versus a 75 MW portfolio, we’re not going to go talk to the same people because they are interested in different things.

Sean Swentek: Tax credits have already grown to be a $10 billion market. If you were to look at your crystal ball, where do you see this going in the future?

Adam Shor: More. This is a fun time to be in solar, and the Inflation Reduction Act, for the first time in my entire career in solar has given us a runway for… it’s almost a decade long. In reality, if you look at the Inflation Reduction Act, there’s a little caveat or a comma associated with that ten-year time period, because it’s ten years or as long as it takes the United States economy to decarbonize to certain levels. Wood Mackenzie wrote a great article on this and its general consensus that it will take the U.S. economy roughly into the mid-2040s before we’re going to be able to decarbonize to the levels associated with the Inflation Reduction Act.

And so assuming no legislative change, we’re going to see tax credits for these projects and a whole bunch of other types of renewable technologies and clean tech available for the next almost 20 years. I will also add more of a solar tax equity 201/301 comment: as you get into the subtleties and as you spend more time doing this stuff, the first half of the year is starting to be occupied with tax equity transactions. All the developers are trying to find their dance partner, for lack of a better word, on the tax equity front for the projects that they’re going to get done in that calendar year.

Then the second half of the year — there are always exceptions to this — but the second half of the year is really when we’re starting to see more transfer activity, where folks are trying to transfer the credits before the end of the year, where the buyers of those transfer credits are trying to effectuate those transactions before the end of the calendar year and lock those in before they make their final quarterly payment or their final estimated payment. I think that… well, there are a few guarantees in life, but I know this to be true, that solar is going to keep growing because the fundamentals of it are so good, and by proxy, provided there’s no legislative change — and I’m not predicting that, to be clear — we’re just going to see more and more of this stuff.

Sean Swentek: What do you see as potential changes in the market given the political climate? Will it adversely or positively affect our marketplace one way or the other?

Adam Shor: I think that solar is insulated from this a little bit in that solar, in my opinion, has kind of transcended past the moment of political risk. That’s not to say that there won’t be changes in legislation or potential reductions in bonus credits in the hypothetical, but solar continues to demonstrate that it is winning, and it is the lowest cost form of new power generation in the country. It’s being added at such a scale that it’s generating tremendous amounts of new jobs. Prevailing wage requirements associated with these tax credits are resulting in the folks building these projects getting paid better than they ever have before. And the technology of the next decade and change — energy storage and AI and electric vehicles — is driving demand for power at levels that we haven’t seen before.

Regardless of your politics, red, white, or blue, you’re going to want to buy the cheapest power you can, okay? And solar continues to deliver on that. And if you look at it from a purely technological standpoint, solar is nowhere near its full potential. Like the actual solar panels themselves are going to continue to get better. We haven’t seen dual junction or tandem junction cells at a commercial level yet. And when that happens, and we start to see a 33% efficient solar panel? Game over, like this should be everywhere, okay? And that’s going to be wonderful because we will have power for humanity and we’ll be able to continue to grow as a society.

Now that’s a long-winded answer to your question of what’s going to happen. I think that if we have a Democratic administration, we will likely see continued interest in promoting cleantech and renewable energy. If we have a Republican administration, we may see them try and rein in the IRA because their stated goal is extending the Trump-era tax cuts, and they’ve got to find a way to pay for that. And there are lots of things in the Inflation Reduction Act that may warrant taking a look at, because the Inflation Reduction Act is resulting in exactly what its intended use was, and that’s a crazy amount of development in the space. Good time to be here.

Sean Swentek: The IRA did not just create tax incentives for solar. There’s a lot of other renewable opportunities out there. What are you seeing as far as uptake on battery storage, EV, geothermal, all these different options that are out there?

Adam Shor: Everybody needs money is the general theme, and that is resulting in higher demand across these technologies, which in turn is causing the price of tax equity to increase because the supply and demand is just totally out of whack. Interestingly, a lot of RNG projects where folks are generating renewable natural gas and those things, those projects generate tax credits, you still have the traditional wind and solar. Geothermal is coming. Energy storage, I think, is the next big wave. I think that we’re going to see batteries everywhere. And I go back to a conversation I had in San Francisco probably five or six years ago, where somebody hypothesized that we would see commercial buildings have batteries on every building before we see them with solar on every building. And at the time I thought that was kind of a crazy idea.

But now we’re moving more and more in that direction where batteries just offer an immediate arbitrage opportunity. Obviously, in an ideal world, you pair the battery with solar, but that doesn’t always have to happen. And so we’re seeing a ton of standalone battery projects, both at the utility scale and at the commercial scale. I think we’ll continue to see that because it just helps the grid and there’s an economic opportunity associated with that as well. And I think that we’ll continue to see other forms of technology develop. Earlier this year, I had a conversation with somebody about transitional windows in a new building development that also qualified for tax credits. And so I’m less familiar with that, but there are a lot of things happening because of the IRA.

Sean Swentek: Adam, could you provide a brief overview of the different structures that one could use to monetize the tax benefits of a project?

Adam Shor: So there are three predominant structures to monetize tax benefits in solar. And this is the structured finance piece: the partnership flip, the inverted lease, and the sales leaseback. Now, as a… thanks to the IRA, we now have transferability. Thanks to the creative attorneys in the space, we now have T-flips, which are a hybrid of the partnership flip and transferability. Each of these structures is going to optimize for something slightly different. A solar project is going to generate both tax credits and depreciation. If you’re a solar developer, you may not have the ability to monetize any of that, or you may not have the ability to monetize enough to warrant keeping it yourself. And so you want to bring in a third-party investor to help you monetize these benefits.

A partnership flip generally is going to monetize 99% of the tax credits and 99% of the depreciation. An inverted lease, on the other hand, is going to generate, or it’s going to monetize 99% of the tax credits and 49% of the depreciation. And so in an inverted lease, there are obviously some tax components to this. But if you are a business owner with operating revenue, maintaining that 51% of depreciation may be more valuable to you than selling that to a third-party investor at whatever they value that depreciation as.

The sale leaseback, on the other hand, is a scenario where you’re literally selling the asset to an equipment leasing partner or financing entity. A lot of these folks are banks, and then they lease it back to you, and that bank is then going to monetize the tax benefits at their election. In that scenario, it is the most efficient use of your own capital if you’re trying to not keep any of your own dollars in the deal. And that’s not entirely true, because sometimes there’s prepaid rent and sometimes there’s reserve accounts and so forth. The bankers would want to make sure that I say that. But at the same time, you’re using somebody else’s money to pay for the system, and they are in turn going to monetize the tax benefits. In transferability, you are literally just selling the tax credit. Transferability does not monetize depreciation. If you value depreciation, that is a way for you to hold onto that.

Then the T-flip is a scenario where, kind of like the preferred equity structure that I mentioned earlier, you’re effectively bringing in a partner. You’re selling your project into that partnership at fair market value, which allows you to benefit from the step-up between your cost basis and your fair market value basis. And then from that partnership, you’re allowed to transfer the credits out. And so it’s a way to create another flavor in the market, but simultaneously try and monetize as much of the tax benefits as you can from the development standpoint. Now, T-flips ironically require sort of a second transaction relative to just a partnership flip, but it’s another means to an end. And so there’s a reason why everybody elects to do what they do in this market and they all offer or they all optimize for something slightly different. And I think it’s important to make those distinctions.

Sean Swentek: Do you have a favorite project you’ve worked on in your career?

Adam Shor: I do, and I’ve worked on lots of projects. But there was one project in particular in Sonoma County in California, where the developer was smart and clever, but also wildly hard-headed enough to essentially compete with the Sonoma County Planning Commission for two years and change,as long as it took for them to ultimately give him the permit. Because he wasn’t wrong. They just didn’t want solar; they wanted more wineries. But he wasn’t wrong. And so he got the project approved, he got the project built. I helped him finance it. And I then Sonoma County changed the rules. You can’t do what he did anymore. But I love that project because of the effort that went into it, the creativity, and the fact that it got done.

Sean Swentek: Adam, you’re a renowned solar expert. You’ve built a career on, kind of bridging the gap between solar experts and solar neophytes, for lack of a better term. Do you have any just parting words of wisdom for people who are newer entrants to the renewable industry and are just lacking on the direction of where to go?

Adam Shor: That’s a humbling comment and question. I’d say pay attention to the folks that have been here for a while. I think that there are some really good resources. Keith Martin’s podcast that he does on a regular basis. Jan, SolarWakeup. I mean, these are free resources. Take advantage of them, learn. These folks have been doing this for a long time, and pay attention and recognize that there is literally more opportunity than the folks that are in this industry can capitalize on today. There is going to be, if there’s not already, a human capital constraint in this market, and we need more people, okay?

And so there’s never been a better time to get in solar in the same way they say, you know, the best time to plant a tree was 20 years ago. Well, the best time, the second best time is today. Right now is the best time to get in solar. It was not a great time to get into solar 20 years ago. And so, come on, we need more people! And there are going to be people along the way that will educate you. I spend a tremendous amount of time educating both the developers on how to do these structured finance transactions and also the tax investors that are looking for different things. Structured finance folks don’t speak solar, at least in the beginning, and solar folks don’t speak structured finance. And so you got to build a bridge. And so that’s kind of where we’re at right now.

Sean Swentek: Bridge-building, I like it. Adam, thank you for joining us today on the Future of Commercial Real Estate. It’s really been a pleasure.

Adam Shor: Thanks for having me, Sean.

Sean Swentek: We’ll see you on the next episode.

Narrator: That’s a wrap for today’s episode of the Future of Commercial Real Estate. To stay ahead of the curve, visit omnidian.com and subscribe to our newsletter for the latest insights and strategies in the CRE industry. Thanks for tuning in, and we’ll see you next time.